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Franchise Law Update

Commentary on Business and Legal Issues of Franchising

Must You Make Your Company Email Available to Employees for Union Activities?

Posted in Business Updates, Legal Decisions, Regulatory Compliance

In a reversal of prior precedent, the National Labor Relations Board (NLRB) late last week concluded that most employees may use their company’s email system for activities related to Section 7 of the National Labor Relations Act; i.e., collective bargaining activities. The NLRB claimed that its decision is “carefully limited,” holding that a company’s email system can be used for collective bargaining activities:

  1. If the employees who wish to use the employer’s email system have already been granted access to the system in the course of their work. In other words, employers are not required to provide access by this ruling.
  2. If the employer cannot demonstrate “special circumstances” necessary to maintain production or discipline requiring a total ban on nonwork use of email.
  3. That said, the NLRB decision also notes that an employer may “apply uniform and consistently enforced controls” on the use of email, but only the extent such controls are necessary to maintain production and discipline.
  4. Importantly, the decision did not address email access by nonemployees or any other type of electronic communications systems.

While the NLRB did not define what “special circumstances” will suffice for a total ban or controls on use of email for Section 7 activities, it did explicitly note that the right of use does not turn on the unavailability of traditional face-to-face discussion or the availability of alternative communication options–Facebook, Twitter, blogging and the like.  Similarly, the Board stated that the “mere assertion of an interest that could theoretically support a restriction will not suffice”. Instead, any particular restriction must demonstrate the connection between the interest it asserts and the restriction. On the other hand, the NLRB noted that an employer could prohibit large attachments and/or audio/visual files if those attachments or files interfere with the efficient operation of the email system.

What does all of this mean? First and foremost, an appeal is almost certainly likely, so stay tuned. However, in the meantime, the email issue will continue to be litigated before the Board. For now, total, blanket bans on the use of email for nonwork activities, like the one considered in the NLRB’s decision, are now illegal. Moreover, now is probably a good time for employers to review all of their electronic communications policies to ensure compliance with the law, including this new decision–or at least to understand their risk!

Can Misrepresentation of FDD Start-Up Expenses Be a Cause of Action? (At Least One Court Says “Yes”)

Posted in Food Service, Legal Decisions, Start-Up and Emerging Franchisors

zstockphotos141100013_jpgbucketldownloadas33276665_lLast month we posted about an interesting discussion that occurred at the ABA Forum on Franchising Annual Meeting about the extent of a franchisor’s duty to assure that initial start-up expenses disclosed in Item 7 of the FDD are correct and accurate.  Around the same time the District Court for the District of Columbia ruled in the case of A Love of Food I, LLC v. Maoz Vegetarian USA, Inc.  that a franchisee properly alleged a cause of action under Maryland and New York state franchise laws for misrepresenting initial start-up expenses in its FDD.

The plaintiff was the franchisee of the quick-service vegetarian-themed restaurant franchise system expanding into the United States, Maoz’s Vegetarian.   After operating at a loss for over two years, the franchisee closed its business and sued the franchisor, Maoz, claiming violations of both the Maryland Franchise Registration and Disclosure Law and New York Franchise Sales Act for, among other things, misrepresenting initial start-up expenses under Item 7 of the FDD.

According to the decision, courts are reluctant to impose liability for alleged inaccurate disclosure of start-up costs because they are based upon, and clearly labeled as, estimates.   By definition “estimates” involve an opinion or judgment that is only a rough or approximate calculation.    Even where a there may be an actionable cause of action, courts permit a franchisor to raise the defense that it exercised reasonable care and could not have known of the misstatement.

In this case, however, the franchisee argued that Maoz had “so little information upon which to base its numbers that the franchisor’s estimates were made with at least reckless disregard for its truth.”  The franchisee also alleged that Maoz willfully failed to provide updated information during the negotiation period or prior to the franchisee signing the lease.

The DC Court determined that there were genuine issues of fact regarding whether the start-up costs disclosed in Item 7 were actually false when made because it was unclear whether Maoz knew that start-up costs in the United States were higher than it disclosed in the FDD provided to the franchisee.  The franchisor had completed the build out of its New York location prior to presenting the FDD to the franchisee but Maoz responded that it had not compiled relevant financial information to know that costs were higher prior to the release of the FDD.    If Maoz did know of the increased costs and did not provide the updated information to the franchisee at the time the franchisee executed the franchise agreement then liability could exist under the Maryland and New York statutes.

This case reinforces the need for start-up or emerging franchisors and international brands expanding into the United States to be conservative and careful when considering the Item 7 estimates required to be made in an FDD.  Although it is impossible to fully protect against the risk of litigation by a disgruntled franchisee, waiting to complete an FDD until reasonable estimates of start-up expenses from company-owned outlets are available or hiring an experienced consultant may create the type of documentary record that could help prevent or defend causes of action for misrepresentations in Item 7 estimates.

Have You Considered the Challenges of Operating in Nontraditional Locations?

Posted in Drafting Tips, Food Service, Start-Up and Emerging Franchisors

Christopher Egan, counsel for Dunkin Brands, Inc. had some very interesting comments during the program he presented at this year’s ABA Forum on Franchising Annual Meeting in Seattle, Washington  about the different expectations franchisees operating in alternative or non-traditional venues such as airports, stadiums, amusement parks or grocery stores have of franchisors.

A franchisor can generally expect a franchisee entering into an alternative venue to likely have a different and stronger bargaining power.  Usually there are connections to the venue that the franchisee holds which have allowed the franchisee to enter the venue and provides the franchisee with much greater leverage than the typical franchisee.  These franchisees expect that brands will accommodate their demands.   For example, he mentioned that these franchisees may request, and expect, that the brand modify its signs, layouts and equipment requires to meet the needs of the alternative venue space.   Mr. Egan explained that Dunkin maintains different portfolios of requirements, layouts and standards for each type of alternative venue the brand operates.  Finally, many franchisees in these alternative venues expect lower fees whether initial fees, royalty fees and/or advertising fees to account for the fact that it is operating in an alternative venue where customers and hours of operation may be limited.

It was interesting to hear Mr. Egan speak about how Dunkin addresses unique franchisee demands in alternative venue arrangements. Of course, these issues can also find their way into more traditional locations as well due to creeping zoning ordinances or local sign regulations.  The Takeaway?  It is important for a franchisor to understand that its traditional model may not always work and it must be flexible with franchisees if it wants to be successful operating in alternative and non-traditional venues.

We Forgot What? Here’s One Way to Handle a Missed Contract Term

Posted in Articles, Business Updates

I stumbled upon this story at the Wall Street Journal’s CMO Today blog. Arby’s has an exclusive deal with Pepsi. As part of Arby’s contract with Pepsi, it is required to feature Pepsi in two television advertisements a year. Well, the calendar says it is December and, it turns out, Arby’s has run only one advertisement featuring Pepsi this year. And, having a good calendaring system, Pepsi reminded Arby’s of the requirement.

So, what is a good partner who doesn’t want to breach a contract and/or upset its carefully planned holiday advertising to do? Perhaps the answer will surprise you:  Arby’s had its adverstising agency create a commercial that features . . . wait for it . . . Pepsi! And only Pepsi. That’s right, with the wonderful voice over of Ving Rhames, Arby’s explains that it simply forget about the contract requirement and asks for forgiveness.  The advertisement, which can be seen on YouTube in its entirety, finishes with the tagline: “Arby’s. We have Pepsi.”

Both Arby’s and Pepsi love the commercial. And, while it does mean Arby’s will be adding a new commercial to the carefully planned mix of those already planned for the end of the year, for Arby’s, it continues a trend this year of unconventional advertising. For example, Arby’s also created this 13 hour commercial of brisket smoking, demonstrating that its smoked meat is real.

I thought I’d mention this commercial on this blog because it demonstrates that there are often many ways to resolve a contract dispute. Arby’s was particularly up-front and honest about this situation and found a way to solve the contract dilemma, please its partner, continue to post some unconventional but memorable advertising, and get a lot of earned media in the process. Especially when it comes to working with partners, finding ways to solve disputes short of litigation–even in cases where it looks like the facts are one-sided–with humor and grace can often be the better long-term option.

Can They Post That? Plan Ahead for Social Media Posts from Rogue Employees

Posted in Business Updates, Regulatory Compliance

We’ve all seen the YouTube videos. The boy taking a bath in the Burger King sink. The Golden Corral manager who was allegedly hiding expired food from health inspectors. The, um, grossness of the adolescent fantasy the Domino’s Pizza employees. Employees who “go rogue” on social media and do damage to their employer’s brands on social media.

It’s a question that I and the other franchise attorneys at Fox Rothschild get a lot: what can we do to attempt to head off employee social media activity that might be harmful to the brand? The answer is that you need a written social media policy that is effective and legally enforceable. As my colleague Christina Stoneburner noted in an article written for Inside Counsel, you need to be careful when drafting such a policy. Recent court decisions tell us that social media posts by employees meant to be private are just that: private. An employer cannot coerce its employees to provide passwords to private sites. Similarly, the NLRB has determined that one employee simply “liking” another employee’s post on social media may be “concerted activity”.

Nonetheless, you need a policy. Without one, you are open to any number of attacks respecting random and/or disparate treatment when you go to reprimand an employee. A good social media policy should include the following elements:

  1. Advise employees that social media posts, especially those about the brand, may be monitored so that employees cannot claim that they had a reasonable expectation of privacy in the posts.
  2. Address whether and how posts may be made using company equipment. This is a delicate point. You can ban employees from using company equipment to post on social media, but you may not want to have such a ban, especially if you wish to encourage employees to make positive posts about the brand on company equipment.
  3. Clearly define “confidential information” and prohibit its disclosure. A detailed, itemized definition of “confidential information” is more likely to be upheld by a court or the NLRB than some generalized statement about “company business”.
  4. Clearly define and prohibit the use of bullying, threatening or discriminatory comments against employees, customer, or vendors.
  5. Encourage employees to promptly report posts they find offensive or discriminatory, state that all such reports and complaints will be investigated, and investigate them promptly.
  6. Bar employees from engaging in illegal activity online.
  7. Prohibit employees from defaming or disparaging customers.

Importantly, your system needs to ensure that franchisees are required to have their own social media policies as well. It doesn’t need to be the same as the franchisor’s policy, but it should be similar and, of course, be geared to brand promotion and protection. Sometimes I’m asked if it is okay for the franchisor to draft a “model” policy for its franchisees. Generally, I don’t have any objection to making such model or example policies available for use by franchisees. The key, remember, is that the franchisor cannot retain the power to enforce the policy against the franchisee’s employees–that is the responsibility of the franchisee. (Of course, the franchisee itself could be reprimanded for failure to enforce the policy, so long as that requirement has been made part of the franchise agreement.)

Before putting it into effect, we recommend that you discuss any social media policy with counsel so as to ensure you’ve taken every step to ensure its legality. Moreover, your policy should be regularly updated to reflect both trends in social media and the law. At the end of the day, even the best thought-out social media policy won’t eliminate every rogue post. A well-designed and well-communicated policy, however, will assist franchisors and franchisees at preemptively detering such behavior and again when disciplining the rogues.

Entering Tribal Venues? Complicated Issues Ahead

Posted in Drafting Tips, Start-Up and Emerging Franchisors

Unless you are practicing in certain geographic areas, a franchisor may not have a lot of experience negotiating the entrance of a franchise into a Native American tribal venue. There are many franchise systems, however, that operate in such venues, for example, by operating outlets within casinos on tribal land.  The alternative venue program at the ABA Forum on Franchising Annual Meeting this year provided a very good “Top 3 Issues List” that can be useful to a franchisor in deciding whether to enter a tribal venue:

  1. First, determine whether the franchisee is required to use a qualified Native American contractor or contractor approved by the tribe. If so, identify and evaluate whether the franchisee will still be able to meet system standards if it uses the contractor.
  2. Second, conduct full and complete due diligence to assure that the tribe actually has authority to lease the land and that the parties in the tribe that you are contracting with have the ability to enter into the transactions you contemplate. You may have to thoroughly review the governing documents of the tribe.
  3. Lastly, think about dispute resolution procedures. Since tribal entities are considered sovereign nations and in many cases the tribe is the franchisee you will have to assure that the tribe executes a waiver of sovereign immunity. In many cases, the franchisor should obtain local counsel in the area who has experience with the specific type of tribal law at issue. The sovereign immunity waiver needs to be enforceable and successful in avoiding tribal courts.

The Takeaway? Tribal lands in many ways are foreign countries. You wouldn’t go abroad without having experienced local franchise counsel. You should treat tribal lands in the same manner. Nonetheless, while there are many complicated issues to consider when entering a tribal venue this Top 3 List is a great place to start.





Are You Ready for the Final FDA Menu Labeling Rules?

Posted in Food Service, Industry Updates, Regulatory Compliance

Important news for restaurant and food service franchise systems:  Yesterday the U.S. Food and Drug Administration (FDA) released its much anticipated food labeling rule requiring that calorie information be listed on menus in “chain” restaurants and food establishments.   The new rule applies to any chain and franchised food business which meets the following criteria:

  1. It is part of a system with 20 or more locations;
  2. All of the restaurants or food establishments in the chain do business under the same name; and
  3. All of the restaurants in the chain offer for sale substantially the same restaurant-type food menu items.

The new rule implements the nutrition labeling provisions of the Patient Protection and Affordable Care Act of 2010 (Affordable Care Act) and, according to the summary portion of the rule, is intended to make “nutrition information available to consumers in a direct and accessible manner to enable consumers to make informed and healthful dietary choices.”

Any covered establishment meeting the criteria has until December 1, 2015 to comply with the new rule.

The FDA also released today its final vending machine rule which requires operators who own or operate 20 or more vending machines to disclose calorie information for food sold from vending machines, subject to certain exemptions.

Check back here in December for a more detailed analysis of these new rules and what compliance will mean for franchised restaurants and retail food outlets.

No Surprise: IFA Reports McDonald’s Led to an Uptick in NLRB Complaints

Posted in Industry Updates

The Wall Street Journal recently reported that, according to the International Franchise Association, there has been an increase in the number of complaints filed against franchise systems since the surprising opinion the National Labor Relation Office of General Counsel issued in July that McDonald’s could be treated as a “joint employer” of employees working at its franchised locations.

According to the IFA, “in the three months since the NLRB disclosed the complaints against McDonald’s, 61 new charges have been filed against 27 other franchise brands, with a number of those raising the joint-employer claim.”   IFA President, Steve Caldeira, speaking on the association’s behalf stated that the complaints threaten the franchise industry and destroy the contractual relationship established between franchisors and franchisees.   The report of additional complaints is not surprising but it will be interesting to see how the NLRB addresses the charges which raise the joint-employer claim.  We will continue to keep you posted on this important issue.



South Korea Fair Trade Commission Imposes Huge Penalty on Franchisor

Posted in International Franchising, Legal Decisions

The South Korea Fair Trade Commission (“SKFTC”) recently imposed the maximum possible penalty—1.9 billion won (approximately US$1.88 million)—on a South Korean franchise for violating the Fair Transactions in Franchise Business Act (the “Act”).  Caffe Bene, a company with over 1,860 stores in fourteen countries and valued at 176.2 billion won (approximately $171 million), incurred the fine for passing disallowed costs on to its franchisees.

The penalty—the largest ever imposed by the SKFTC—demonstrates its intent to aggressively pursue Act violations and comes soon after major amendments to the Act early this year.

The violation stemmed from a partnership inked between Caffe Bene and KT Corporation (formerly Korea Telecom; “KT”).  The agreement offered 10% discounts to KT subscribers and split the costs equally between Caffe Bene and KT.  Despite opposition to the promotion by 40% of its franchisees, Caffe Bene forced its franchisees to implement the promotion and absorb the losses.  According to the SKFTC, Caffe Bene’s actions violated by the Act and its franchise agreements, which allocated marketing and promotion costs equally between Caffe Bene and its franchisees.

The SKFTC’s investigation further revealed that Caffe Bene required franchisees to redesign their stores, pay for “necessary equipment” from headquarters or a designated third-party, and purchase items that the franchise agreements designated as “optional.”  These practices generated 181.3 billion (approximately $176 million) in interior remodeling and equipment sales to franchisees between November 2008 and April 2012, accounting for nearly 56% of Caffe Bene’s total sales during that period.

This case is clearly an egregious case because the SKFTC’s findings were that the franchisor violated both the Act and its own franchise agreements. That said, it also highlights the risk/reward inherent in international franchising. We’ve all heard it before, but it bears repeating:  the failure to work with experienced local counsel, whether you are a domestic franchisor going abroad or an international franchisor coming to the United States, is dangerous. Here, it appears that significant changes to the South Korean Act were missed. While good counsel does not ensure success, it definitely helps to manage that risk.

Urgent Hotel Wi-Fi Security Warning

Posted in Business Updates, Uncategorized

Every business uses the internet. Especially franchised businesses with far flung operations working together to promote the brand. So, this latest Wi-Fi security warning is relevant to all of us.

Kaspersky Lab–one of the leading internet security companies–has issued an urgent security warning to business executives travelling to the APAC region. The concern is that there is an internet espionage campaign nicknamed “Darkhotel” targeting top US and Asian executives staying at luxury hotels.

The installation is very sophisticated. After logging into the hotel’s Wi-Fi network, the attackers trick the victims into downloading and installing a backdoor that pretends to be a update for legitimate software, such as Google Toolbar, Adobe Flash, or Windows Messenger. The malware installs a Trojan program, advanced keylogger and an information-stealing mode. These tools are used to capture system information, steal keystrokes and hunt for cached passwords. Kaspersky also found that the malware has been used to steal intellectual property from the victim’s companies. Most insidiously, once finished, the attackers carefully delete their tools and go back into hiding.

What can you do to protect yourself? As we have previously noted, being proactive is the best strategy:

  • Use a Virtual Private Network (VPN) so that your communications are encrypted when accessing public or semi-public Wi-Fi (such as hotel networks).
  • Regard any prompt to update software when using a public Wi-Fi network as suspicious. Moreover, you should always confirm that the update installer is digitally signed by the software vendor.
  • Make sure your Internet security solution is proactive against threats, rather than purely defensive or basic anti-virus protection.

These steps will go a long way to protecting yourself and your brand from malware attacks.